Question

4. The cost-effectiveness ratio can be determined simply by dividing the cost of a program or a project by that of an alternative project. This demonstrates how using a cost-effectiveness ratio is a simple, but effective way to look at a group of projects or set of regulatory alternatives (we don’t need to know if a policy is efficient or what the benefits are to figure out if a policy is cost-effective).

a.) Let’s say the proposed CAC approach for controlling air pollution will cost the city of Whoville $12 million dollars where the Least Cost approach will be $7 million dollars? Calculate the cost-effective ratio of CAC Cost to the Least Cost.

b.) Does the ratio calculated above imply that the CAC approach for Whoville is cost-effective? Why or why not?

c.) If subtract the ratio above by 1.0 the remainder can be interpreted as the percentage increase in cost from that which would be necessary. What is this percentage for the ratio you calculated in part a?

Answer 1

Answer a)

Cost-effective ratio of CAC cost to least cost= $12 million/$ 7 million= 1.714.

Answer b)

Ratio calculated above imply that CAC approach is not cost effective because cost effective ratio of CAC cost to least cost is greater than 1. It means least cost approach is cost effective.

Answer c)

Ratio calculated in a) above is 1.714.

If we subtract 1.0 from 1.714 we get 0.714, i.e. 71.4% is the percentage increase in cost from that which would be necessary, i.e., $ 7 million.

71.4% can also be calculated as ($12 million-$7 million)/$ 7 million.